Dimensional Fund Advisors co-CEO and CIO Gerard O’Reilly says value is poised for a comeback but that the data is too “noisy” to know when it will happen. This according to a recent article in Advisor Perspectives.
O’Reilly, a PhD from Cal Tech in aeronautical science, claims that his education refined his analytical skills and helped him hone his firm’s mission of creating “academically vetted methodologies,” the article says.
Regarding the state of value investing and where it goes from here, O’Reilly made the following key points:
- The process for identifying value stocks has changed, and firms must adapt their approach to account for regulatory and “market microstructure” changes.
- Spreads between growth and value are wide, but the data is “noisy” when it comes to predicting returns.
- The argument that value has become crowded is “not compelling,” says O’Reilly, since the demand for value stocks has not increased in the aggregate.
- As you include more global data, the performance of value improves. While value has been negative in the U.S., O’Reilly notes that it has been positive in 14 other countries. “Diversification gives you the flexibility in implementation to capture those country returns,” says O’Reilly, but adds that U.S. investors can be justified in overweighting domestic stocks because (1) familiarity bias can lead to longer holding periods (and therefore greater success) and (2) dividends from foreign companies are subject to withholding.